Greed is not always good

Much of the media focus surrounding this week's sentencing of Bernard Madoff has been on the question of whether he deserved a life sentence for his crimes and whether any sentence could ever bring restitution for the victims of his Ponzi schemes.

After all, at US$65 billion, this is the biggest corporate fraud in history; how could any sentence, no matter how large, improve the lives of those whose life savings have been wiped out and now face many years of possible destitution?

However, there are also deeper issues here concerning the role of individual virtue in public and financial life that have been overlooked and yet which the case clearly raises.

The tragic circumstances of those who have been defrauded by Madoff are, in a way, the logical outcome of a society that praises individual selfishness in economic life. There is little expectation that business leaders should be interested in anything other than profit. As the Chicago economist Milton Friedman famously noted, "the social responsibility of business is to increase its profits".

Things are very different in the public sphere. We expect our politicians and public servants to be motivated by the public good. In Australia the ethos of public service, as outlined by people like H.C.("Nugget") Coombs, is regarded as a model for how all of those on the public purse should behave.

There is an expectation that these public figures should be motivated by ideals other than mere self-interest. And just as we often expect our sportsmen and women and other public figures to be role models and act in ways that we think reflect well on us as a society.

But there is no such expectation of our business people.

In part the explanation for this lies in the dominance of so-called 'Invisible Hand' justifications of the market. According to enthusiasts of the Invisible Hand, the pursuit of self-interest is all that is required.

Benevolence or public-mindedness are not necessary for, and, surprisingly, are sometimes counter-productive to the generation of public goods. As the Scottish philosopher and economist Adam Smith (1723-90) notes in The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

Instead we rely on the self-interest or self-love of those who provide us with such advantages. Smith's point is that self-interest generates these social benefits that we all enjoy (in this case the food on our table), without the butcher or the baker caring directly for our well-being. They are unintentional. No one needs to be virtuous for goodness to arise.

The influence of this on our thinking about the obligations of businessmen has been considerable.

As an academic economist reminded me recently, the efficiency of the market means that we don't need to "worry about the motivations of individual players". The culture of business says that morality is irrelevant, for in the market we have a system that generates great social benefits without anyone intending them.

But what is not so clear is that the Invisible Hand requires that we rid ourselves of moral scruples. One can aim to make profits and thereby generate public benefits without being completely devoid of moral scruples. Why think that the Invisible Hand only works for those profit-seekers who are unscrupulous?

Indeed, the Madoff case highlights how important it is for business people to have moral scruples. Yet it is often hard for them to do so, since there are considerable pressures on business people to lose sight of moral values.

Firstly, competition often means that those who are scrupulous are at a disadvantage. There is often something Darwinian about business practice.

Secondly, there is the point that the ancient Greek philosopher Aristotle (384 BC- 322 BC) made 2,300 years ago that pursuing money is an activity without a final point: one can always make more money.

It is not like, for instance, building a boat, where you know when you have finished. Making money can become an endless pursuit. In that way we are always tempted to pursue more and more money; a point which the Madoff case clearly illustrates.

Finally, there is the cultural myth of many in the business class that, because of the existence of the Invisible Hand, they are exempt from moral concerns.

What we require then is recognition that people in the commercial world need virtues, just as surely as those in the public sphere. To be sure, this is not going to be enough.

Clearly, in the wake of the Madoff case, public regulators (especially in the United States) will have to pay greater attention to Investment schemes - they should be subject to far greater scrutiny. But for good social outcomes, we cannot rely solely on systems of regulation any more than we can of the system of the Invisible Hand.

Here I am reminded of some lines from T.S. Elliot's poem The Rock:

They constantly try to escape

From the darkness outside and within

By dreaming of systems so perfect that no one will need to be good

We need to remember that as Plato once suggested in the Republic good societies require good people and the mantra that greed is always good is partly to blame for the massive hurt of those taken in by the Madoff's corrupt Ponzi schemes.

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